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HollyFrontier Corporation (HFC - Free Report) has been in investors' good books for quite some time now, owing to its refining strength, diversified operations and strategic strides. The downstream operator has had an impressive run on the bourses, with its shares surging by a whopping 208.8%, handily outperforming the industry’s growth of 64.5%.

HollyFrontier is one of the largest independent oil refiners in the United States, with a combined crude oil processing capacity of approximately 457,000 barrels per day. A major advantage of the company is the high-complexity index — the capability to process a wide mix of crude — and its access to some of the fastest-growing domestic markets, afforded by its portfolio of five refineries.

While the company has successfully diversified its business by investing in the midstream activities, along with Lubricants and Specialty Products unit, its refining segment still remains the strongest, being the main contributor to its earnings. In the last reported quarter, net income from the segment was $309.3 million, reflecting a massive turnaround from the year-ago quarter’s loss of more than $94 million.

In spite of the recovering crude strength, refining environment has been favorable for the company, as it has been taking advantage of the pricing discrepancies of various crude oils. Since HollyFrontier has the capacity to refine heavy or sour crude, unlike many other refiners, the company can purchase crude at discounted prices, thereby securing higher margins. Along with that, the company has also managed to run its facilities at high utilization rates, thereby helping it to reduce per-barrel operating costs.

IDR-Simplification Deal Bodes Well

With the completion of the incentive distribution rights (IDR) deal with its partnership last October, HollyFrontier now owns more than 59% stake and a non-economic general partner interest in Holly Energy Partners L.P. (HEP - Free Report) . The IDR deal has incentivized the company to manage operations efficiently, tap acquisition opportunities and improve payout for both HollyFrontier and Holly Energy. Holly Energy helps the company achieve fee-based revenues with limited commodity price exposure. In the last reported quarter, the segment profitability was $64.4 million, up from $52.1 million in the year-ago period.

Strategic Acquisition Boosts Profitability

The Petro-Canada Lubricants acquisition of 2017 helped HollyFrontier expand into the high-margin, less competitive business of producing specialty lubricants. While being immediately accretive to the company's earnings and cash flows, the deal was a smart one as it allowed HollyFrontier to inherit a strong brand portfolio with growing market demand.

Healthy Financials Spur Investor-Friendly Moves

The company possesses a robust balance sheet with a manageable debt-to-capital ratio of 28%, providing it with ample financial flexibility. As a show of confidence in its cash flow generating ability, HollyFrontier resumed its planned buyback activity during the first quarter, shelling out $25.2 million in stock repurchases. The downstream operator also pays a competitive dividend with a healthy yield.

Other Favorable Readings

In addition to a favorable Zacks Rank, the stock has a VGM Score of A, which highlights its attractiveness. Here V stands for Value, G for Growth and M for Momentum, and the score is a weighted combination of these three scores. Such a score allows investors to eliminate the negative aspects of stocks and select winners.

Its trailing 12-month return on equity (ROE) supports its growth potential. The company’s ROE of 10.2% compares favorably with 9.6% for its industry. This reflects the fact that it is efficient in using its shareholders’ funds.

HollyFrontier has also been witnessing solid activity in the earnings estimates front, which further boosts analysts’ optimism in the stock. The Zacks Consensus Estimate for 2018 has increased around 7.5% to $5.28 per share over the past seven days. The Zacks Consensus Estimate for 2019 has also moved up 16.5% over the same time frame to $5.93.

HollyFrontier is also valued attractively. The company’s forward P/E ratio of 14.9 (versus the industry’s 22.42) and P/S ratio of 0.9 suggest that HollyFrontier is a pretty good value pick, as investors have to pay a relatively lower price for each dollar of earnings, and that it has decent revenue metrics to back up its earnings.

Final Thoughts

The company has set ambitious growth plans for itself, aiming to double the size of each of its segment to gain economies of scale. As it is, the mega-merger news of Marathon Petroleum Corporation (MPC - Free Report) and Andeavor (ANDV - Free Report) has left investors wondering which companies could be the next in line. With HollyFrontier’s growth goals, it comes as no surprise that the company is in the lookout for prudent acquisitions that can further boost its long-term prospects and add economies of scale.

While the company is bearing the brunt of increasing costs, we believe that HollyFrontier can easily tide over this limitation backed by its solid financials, refining strength and diversified operations.

As it is, the company’s strategic initiatives to enhance growth are expected to carry the momentum forward. HollyFrontier expects to deliver year-over-year growth of 127.59% in 2018 earnings. Moreover, it seems to be an impressive choice for the growth investors, with an expected earnings improvement rate (next three to five years) of 8.93%.

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